A key part of that budgeting is to determine how much to regularly drawdown from your retirement savings. It can be somewhat of a long-term balancing exercise.
Much attention is given to the accumulation of wealth before retirement and increasingly to how retirement savings should be invested and received to reduce the possibility of outliving our retirement nest eggs.
And given Australia’s ageing demographics, it is inevitable that more retirees will seek guidance from financial planners on the twin issues of budgeting for retirement and drawing down on retirement savings. (The appropriateness of retirees’ investment portfolios – given their personal circumstances including tolerance to risk – is, of course, one of the critical related factors.)
A series of Australian research reports over the past couple of years raise valuable points regarding retirement budgeting and the drawing down of retirement savings to consider discussing with your adviser:
- In late 2015, Nick Callil, head of retirement income solutions in Australia for global financial services group Willis Towers Watson, published a research commentary Spending it: Withdrawal strategies in retirement. In examining different withdrawal approaches in retirement, Callil’s paper neatly summarises what retirees are facing: "… retirees have to decide how the money is invested, how to draw down on their pension savings to sustain their lifestyle. Spend too quickly and retirees risk running out of money in retirement. Spend too little and they risk missing the point of saving in the first place; to enjoy a satisfying retirement."
- Dr Andrew Reeson, a behavioural economist and a research leader with the CSIRO in Canberra, recently gave a preview to a forthcoming research paper into how retirees draw down on their super savings. In short, the researchers found that most retirees receiving a superannuation pension choose to take the minimum annual amount required by law. (The minimum required drawdown for super pensions begins at 4 per cent for recipients under 65 and progressively increases with age, as explained in detail by the specialist publication SuperGuide.) Reeson will conduct further research into retirees’ financial and possible non-financial motivations for taking the minimum pension.
- In late 2014, actuary Andrew Boal, managing director of Willis Towers Watson in Australia, published a research commentary – The path to retirement success: How important are your investment and spending strategies? – naming the spending strategies of retirees among the "biggest factors that will determine whether they achieve financial success".
- Retirement and aged care living – a financial planners’ guide for clients preparing for and in retirement, published late last year by Thomson Reuters. The authors devote a chapter to the challenge for retirees of providing an income to meet "spending requirements to maintain a lifestyle goal over an unknown timeframe". The book examines various options for providing a retirement income within the constraints of a retiree’s savings, risk tolerance and investment strategy. This chapter includes discussion of drawing down a percentage of retirement savings each year.
The quarterly ASFA retirement standard report, published by the Association of Superannuation Funds of Australia, provides a valuable guide to the income needed for retirees to have a so-called "adequate" or "comfortable" retirement lifestyle.
ASFA’s retirement standard for older retirees calculated for September 2015 suggests that a 90-year-old, home-owning couple would need about 9 per cent less than a 70-year-old couple to have a "comfortable" lifestyle.
In short, the cost of such basics as food, home maintenance and communication tend to remain much the same for both age groups. Not surprisingly, the very elderly typically spend less on leisure and transport yet more on health and household services.
Retirement budgeting and the drawing down of retirement savings are increasingly significant personal finance issues.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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